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Ed's Blog

Questions are being raised. Will the ballyhooed $1 Billion CFPB settlement with Wells Fargo be reopened because it clearly favors the wrongdoer at the expense of the victims? The $1 Billion settlement represents the total of two $500 Million consent decrees. The first consent order is with the Consumer Financial Protection Bureau (CFPB), which is the consumer regulator for Wells Fargo; the second is with the Office of the Comptroller of the Currency (OCC), which is the safety and soundness regulator for the bank. (The Consumer Bureau’s announcement appears to assess a $1 Billion penalty but then credits the OCC penalty toward its total.)

Sure, Wells Fargo was caught charging consumers for mortgage rate lock-in extension fees caused by bank mistakes, which the bank should have paid.

Sure, Wells Fargo was caught charging consumers for unnecessary forced-place auto insurance. Sure, as many as 27,000 of those consumers may have had their cars repossessed because they couldn’t afford the increased insurance payments bundled into their monthly payments.

Isn’t stopping all this misbehavior and fining the bank $1 Billion a good enough outcome?

Not really. Especially if the victims are not compensated.

Let’s take a closer look.

The $500 Million penalty to OCC goes into the U.S. Treasury, where it can be used for any purpose.

The $500 Million penalty to the Consumer Bureau goes into its Civil Penalty Fund, which is supposed to be used to compensate victims of corporate wrongdoers. However, there are several questions:

Why doesn’t either order specify how much, if any, money must be paid to victims in consumer restitution? As a former CFPB enforcement official told Consumer Reports magazine:

“This case is silent on how much restitution is being provided to the customers,” says Christopher Peterson, a law professor at the University of Utah and former senior counsel for enforcement policy and strategy at the CFPB under Cordray. “It says Wells Fargo can give money back to customers as they choose and CFPB can object after the fact. And my suspicion is, there won’t be objections.”

Under previous Consumer Bureau Director Richard Cordray, compensating consumer-victims was as important, if not more so, as punishing wrongdoers. A typical CFPB order required restitution, and wrongdoers were generally ordered to provide it without consumers needing to do anything. Restitution worked like this: Calculate how much money was wrongly taken, automatically return it to ongoing customers who need to do nothing to get their money back into their accounts. Then search for former customers and mail them a check without making them filling out any forms.

Instead of ordering a specific plan of action to compensate victims, why does the Consumer Bureau’s order defer to the wrongdoer Wells Fargo to establish its own remediation plan and then why does expert consumer regulator CFPB export oversight of the plan actions to the notoriously bank-friendly OCC?

Why does the CFPB order import language from an extremely controversial, pro-industry court case establishing a barrier of proving a “cognizable harm,” Spokeo v. Robins? The only reason to add this language is to allow the wrongdoer to narrow the list of harms to be compensated for. How will the bank use the controversial decision? Will judicial action be required by victims? What harms will be denied compensation for?

Why does the OCC order similarly state that any remediation plan calculate “the economic or other adverse impact on affected customers (which, for the purposes of this Order, does not include emotional harm or distress),” with the parenthetical language similarly seeking to limit Wells’ exposure to adequately compensate for all harms caused by its reprehensible actions?

Why does the OCC order allow Wells Fargo to prepare its own vague remediation plan– which appears to be one that could require consumers to prepare for much hoop-jumping to receive any restitution -- while then specifying that there will be “no supervisory objection” provided, among other requirements, that “The anticipated amount of the total remediation to be paid, refunded, or remitted to customers exceeds $10 million.” Ten million dollars? That says: We will have "no supervisory objection" to your plan so long as at least (or only) 1% of the total penalty is guaranteed to the victims.

A good enforcement action should punish wrongdoers, deter future wrongdoing by others and compensate victims. Yet another critique of the consent decree is that Wells Fargo shareholders are taking a hit, while no executives have been ousted (let alone jailed). As Public Citizen notes, even the one-time $1 Billion bank penalty may not be enough to get the bank’s attention. They also point out that Wells CEO Tim Sloane even got a raise despite the board’s knowledge of the pending order. And among additional countervailing arguments to any theory that $1 Billion must by definition be adequate punishment, Public Citizen points out that Wells Fargo also just started receiving an annual tax benefit of $3-4 Billion from the new tax law.

There is a precedent to reopen this flawed order: If enough questions are raised, I believe that a public clamor could result in a reopening and rebalancing, toward victims, of this flawed order. Ten years ago, Wachovia Bank, now part of Wells Fargo, entered into a settlement with the OCC over its role in a scheme by fraudsters to extract money from consumer accounts. A U.S. Attorneys investigation had caught several third-party payment processors using fraudulent Remotely Created Checks (internal bank routing forms containing magnetically encoded account information that can pass through a bank’s systems without a customer’s knowledge, let alone signature) to simply grab money out of consumer accounts. Among the merchant banks collecting the illegal transfers for the third-party firms was Wachovia. As Charles Duhigg reported in the New York Times in a 2007 story, “Bilking the Elderly, With A Corporate Assist:”

“Although some companies, including Wachovia, have made refunds to victims who have complained, neither that bank nor infoUSA stopped working with criminals even after executives were warned that they were aiding continuing crimes, according to government investigators. Instead, those companies collected millions of dollars in fees from scam artists. (Neither company has been formally accused of wrongdoing by the authorities.)”

(My note: infoUSA was one of several data brokers providing lists of "target" consumers to the scammers.)

In April 2008, the OCC entered into a sweetheart settlement with Wachovia that required consumers to jump through a variety of hoops, including filing and mailing tedious claims requests, to receive compensation. The bank, and OCC, presumably knew that only a small percentage of the alleged compensation fund would ever be paid out. After a massive hue and cry, the OCC was forced in December 2008 to issue a revised order.

“As a result of the OCC's action, the bank will issue checks totaling over $150 million to more than 740,000 consumers. Checks will be mailed today. This revised reimbursement process assures that consumers who have not already received restitution will now receive reimbursement checks.”

That revised OCC Wachovia order in 2008 used methodology similar to that which Rich Cordray successfully used in his nearly six years running the Consumer Bureau to ensure that not only were wrongdoers punished, but consumers made whole. Automatic restitution! His Consumer Bureau directly returned billions of dollars to defrauded consumers. After all, that's its only job: protecting consumers.

Will most of the victims of the latest scheme from a bank that may retire the trophy for Corporate Wrongdoer Poster Child receive any money at all from the acting director Mick Mulvaney’s first enforcement order? After all, so long as the bank guarantees a mere $370 and 37 cents each to the estimated 27,000 consumers who didn't simply pay too much for car insurance, but had their cars repossessed, hasn't it met the OCC's $10 million threshold to avoid further "supervisory action?" That's a weak, vastly inadequate payment for not being able to get to work or to pick up your kids at school, but does it satisfy the OCC's reuirement to avoid further "supervisory action?" If it does, then what about everyone else?

The order uses $1 Billion, a big number to most, but not to a mega-bank, to provide misdirection to its actual intent to let the bank off easy and not help its victims.

At least the revised 2008 OCC Wachovia Order provides a road map to what should be done. This 2018 Wells Fargo order should be reopened and amended to compensate consumers and more effectively punish the wrongdoer. Protect Consumers.